In the case of Vinod Hingorani v SEBI and Anr., where for the first time the Securities and Exchange Board of India (SEBI) had sent an individual, 58-year old Vinod Hingorani, to jail for defaulting on the payment of a penalty, after being empowered to do so, the Bombay High Court held that absent any findings that a person had the means to pay, mere non-payment of dues does not constitute neglect or refusal by the person to pay penalty.

The Hon’ble Court concurred with the views of the Supreme Court in the case of Jolly George Varghese v. Bank of Cochin, AIR 1980 SC 470, that a simple default to discharge is not enough. There must be some element of bad faith beyond mere indifference to pay, some deliberate or recusant disposition in the past or, alternatively, current means to pay the decree or a substantial part of it.
The Bombay High Court held that, the authority could not have ordered detention of the petitioner solely on the ground he had failed to pay an amount or give the proposal.

It observed that Rule 73(1) of Second Schedule read with Section 222(1)(c) of the Income Tax Act and Section 28A of the SEBI Act confers power of arrest and detention only in two situations i.e. when the Tax Recovery Officer is satisfied that (i) the defaulter, with the object or effect of any obstructing the execution of the certificate, has dishonestly transferred, property or (ii) despite having means the defaulter, refuses or neglects to pay the dues. Rule 73(1) further mandates the recording in writing of reasons of such satisfaction.

It also observed that SEBI had not arrived at a satisfaction that the conditions specified in Rule 73(1) were satisfied and had further not complied with the mandate of Rule 73(1) of recording the reasons of satisfaction in writing. The absence of satisfaction as well as recording of reasons vitiates the exercise of power of arrest. The court therefore held that the detention and arrest is patently illegal and arbitrary. Source: WP No. 639 of 2015, High Court of Bombay;

VA View

SEBI’s order to arrest and detention of a defaulter is an extreme step for punishing the defaulters. Under criminal law jurisprudence the test of imposing punishment is required to pass through strict standards laid down for exercise of such powers and should be invoked only when due process has been followed and the pre requisites of passing such an order have been complied with strictly. Decision of Bombay High Court is a welcome step, making it clear in the very instance of arrest order by SEBI that exercise of new found power to order arrest and detention of a defaulter it its hands has to be done judiciously and with great care. The decision of the court has laid down a milestone to keep a check on compliance with the due process of law before resorting to imprison/detain an alleged offender.